Energy Consumption, CO ₂ Emissions, Urbanization and Financial Development in Bangladesh: Vector Error Correction Model

Abstract

This paper examines empirical relationship among the variables of financial development, CO₂ emissions, urbanization, industrial value addition, agricultural value addition and energy consumption in the context of Bangladesh using the data of 1985-2015. Findings of Johansen co-integration test indicates that long run relationship exists among the variables of ܿCO₂ emissions, financial development, urbanization, industrial value addition, agricultural value addition and energy consumption. Whereas, Granger causality results show that unidirectional causality exists among the variables of CO₂ emissions to agriculture value addition, CO₂ emissions to energy consumption, agriculture value addition to financial development, agriculture value edition to industry value addition, financial development to CO₂ emissions, industry value addition to energy consumption. However, this study fails to establish any relationship between ܿCO₂ emissions and urbanization, urbanization and energy consumption in short run in the context of Bangladesh. Results of Vector Error Correction Model (VECM) confirm that except financial development all the explanatory variables are statistically insignificant in the short run. However, the error correction term (ECT) is statistically significant and negative sign. This indicates that ܿCO₂ emission adjusted 37.60% within the year when deviated from equilibrium and the adjustment speed is significant.

Keywords: Carbon emission; energy consumption; financial development; urbanization; co-integration; VECM.